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Markets slumped, but clawed their way back from session lows, as traders balanced encouraging commentary from the Federal Reserve with concerns over the nuclear crisis in Japan. 

Today's Markets 

The Dow Jones Industrial Average was lower by 138 points, or 1.2%, to 11855, the S&P 500 slid 14.5 points, or 1.1%, to 1281 and the Nasdaq Composite was off 33.6 points, or 1.3%, to 2667. The FOX 50 was down 11.58 points, or 1.26%, to 908.

Stocks came back from session lows after the Federal Open Market Committee [FOMC] said it sees the labor market "improving gradually" and the economic recovery on "firmer footing." 

The FOMC held short-term interest rates steady between 0% and 0.25%, a highly expansionary move, in a bid to keep the economy growing. Very low interest rates can spur high levels of inflation, however, the policy-making board said despite rising energy prices, long-term inflation expectations appear to be in check. 

Traders in the U.S. kept a close eye on the situation in Japan, which is the third largest economy in the world. 

An explosion at a Japanese nuclear power plant sent radiation seeping into atmosphere, reaching as far as Tokyo, Japan's densely-populated capital.  News of the radiation leakage prompted many to flee and stock up on supplies like food and water. 

Japanese stocks posted losses as steep as 16% before finishing the day lower by more than 10%, on the heels of Monday's session that sent stocks sliding 6.2%. Tuesday's drop would equate to a 1271 point move on the Dow. 

The two-day losing streak for the Nikkei is the worst since 1987, wiping $620 billion in market value out.

"Instability in [Japan's] nuclear reactors remains the main factor impacting market action and psychology," Peter Boockvar, managing director at Miller Tabak + Co., wrote in a research note. 

Tuesday's session was particularly volatile.  The Dow was down more in the first five minutes of trading than it has been since October 2008, when it started the day lower by 504 points. 

Indeed, the VIX, which is frequently cited as a gauge of fear in equity markets, surged 13%.  

The New York Stock Exchange invoked rule 48 Tuesday morning, meaning trading was allowed to begin without approval from NYSE officials to prevent delays in market opening caused by volatility in futures markets that were down more than 2%.

Insurers like Metlife (MET) and Aflac (AFL) sharply declined on concerns about their exposure to Japan. 

Many American issues of Japanese companies, such as Hitachi (HIT) and Honda (HMC) staged a comeback, closing in the green after plunging in early trading. 

However, the Nikkei was headed toward an opening loss of nearly 5% when the Tokyo Stock Exchange opens at 8:00 p.m. ET. 

Oil followed equities lower on concerns Japan's demand for oil would sink.  Light, sweet crude tumbled $4.01, or 4%, to $97.18 a barrel. 

"It's all about risk," Olivier Jakob, managing director at Petromatrix, a Swiss energy consulting firm, said of Tuesday's falling energy prices. "Everybody is running a stress test with the nuclear risk in Japan." 

The escalating protests in Bahrain could also affect oil prices. The oil-producing country declared a state of emergency and a Saudi soldier was shot and killed by a protester Tuesday. 

In metals, gold sunk $32, or 2.3%, to $1392 a troy ounce -- the biggest percentage decline since January 4.

The U.S. dollar lost 1.1% compared with the Japanese yen as dollar-based assets were sold and converted to the Japanese currency to support rebuilding in Japan. The greenback was essentially unchanged against a basket of world currencies. 

Much of this week's economic data doesn't capture the effects the crisis in Japan will have on the global economy, according to Boockvar.

Import prices jumped 1.4% in February, far more than the 0.9% increase economists were expecting, as energy prices soared late in the month. The New York Federal Reserve's Empire State Manufacturing Index jumped from 15.4 in February to 17.5 in March, in yet another indication that manufacturing activity is improving nationwide. 

Corporate Movers 

General Electric (GE), which designed two of the nuclear reactors used in Japan, was one of the worst-performing Dow components.

Shaw Group (SHAW) shares were lower in on fears investment in the nuclear power industry would dwindle amid fears the Japanese nuclear crisis could be repeated elsewhere. 

DSW (DSW) unveiled fourth-quarter earnings of 41 cents a share, three cents shy of analysts' estimates of 44 cents. 

ExxonMobil (XOM) was upgraded to a "buy" by Goldman Sachs

UBS (UBS) was subpoenaed by U.S. and Japanese regulators over alleged manipulations of LIBOR, the rate at which banks lend to each other. 

European Markets

European markets extended the steep losses in Japan, falling to the lowest levels in 3-1/2 years. 

The English FTSE 100 dipped 1.4% to 5695, the French CAC 40 dropped 2.5% to 3780 and the German DAX plummeted 3.2% to 6647. 

Follow Adam Samson on Twitter @adamsamson.